Accounting has long struggled with whether it should
be a principled professional judgment whether
financial statements fairly depict the condition of
an enterprise, or whether as an alternative there
should be quasi-legislated rules which purport to be
principled but the application of which requires
less professional judgment than a fully principled
approach.

Independence is another challenge for the accounting
profession since audit firms' fees are paid by the
very managements whose actions they scrutinize.
This creates a clear conflict of interest, which has
been resolved in the Insurance sector by Statutory
Accounting which is developed and administered by
public servants.

For
publicly traded enterprises, the Securities and
Exchange Commission has threatened to adopt
government rules if the accounting profession didn't
do so itself. This has led to rules-based
accounting which can fail to disclose embedded
financial values in an enterprise, such as an excess
of market value over accounting value, and such as
hidden factors implicit in pension plans.

These factors make accounting less than valuable for
many stakeholders who might be expected to rely on
financial statements. The accountants counter
that their work is only for informed users, by which
they mean users who have mastered the ambiguities of
the accounting rules.

Recently, the Financial Accounting Standards Board
(FASB) has struggled to bring greater equity to
revenue recognition which particularly affects
CCRCs, but many providers do not give full credence
to the changes as reflective of the underlying
realities, so residents can be misled, and FASB is
not the only accounting standards board ruling on
healthcare organizations.

These accounting conflicts and premises are
of particular concern for prospective residents
trying to discern whether a CCRC is financially
sound.

Entry fee
investments in continuing care contracts represent an act of
faith in the integrity of the provider CCRC that calls for a
high degree of stewardship. Accounting
for CCRCs has not reflected this high standard for financial
care and integrity.Entry fee CCRC accounting has been given its own set of rules,
separate and distinct from the accounting for other industries
and for similar types of transactions.

This needs to be said and said clearly.Today’s entry fee CCRC accounting is misleading and
detrimental to the interests of CCRC residents, who are the
stakeholders with the greatest vulnerability in the financial
soundness of CCRCS.

CCRC
accounting, as it is now promulgated, overlooks the investment
aspect of resident entry fees, assigning to net income all of
the time-value benefits of the lag between entry and contract
performance.It also
allows the advancing of revenue recognition for refundable entry
fees that are contingent on re-occupancy proceeds, on the
premise that successor residents pay the refunds to their
predecessors.This
has the effect of condoning a Ponzi concept which requires
perpetual operation so that the refund to the last resident need
never be paid.Both
promulgations distort the financial appearances of the
accounting statements, which thus depart from the underlying
economics of the enterprise, making operations appear
artificially favorable during the early years of CCRC operation.

Despite this
front ending of revenue recognition, many tax exempt, nominally
nonprofit, CCRCs have impaired balance sheets, meaning that they
lack sufficient assets to fulfill the liabilities for which the
CCRC has contracted.One often hears industry leaders proclaim that “Cash is king,”
as though that were an overriding accounting principle that
negates the alternative principle that revenues only be
recognized as the commitments that induced their payment are
fulfilled.

Because
nonprofit CCRCs don’t have access to equity capital, they have
to use either retained earnings from past profits, donations, or
entry fees, as the equity cushion for their debt financing –
analogous to the down payment on a house.
This overlooks the
obvious fact that entry fees are committed contractual
obligations and not equity capital in the usual sense.The use of retained earnings demonstrates the
misperception that tax exempt CCRCs adhere to nonprofit
principles.

As a result, an
impaired CCRC balance sheet is more telling than an impairment
would be even if the applicable accounting were principled.Since it’s not, prospective residents should exercise
extreme caution in investing in an entry fee contract with a
CCRC which has an impaired balance sheet.They should only make such an investment if they can
afford the prospect that future fees will have to be set at a
level to make up the deficiency over time (unless the
bondholders voluntarily relinquish the value of their senior
secured investment).

Prospective
residents should also be prepared to lose their entire entry fee
investment if the CCRC fails financially and has to seek
bankruptcy protection.In the event of bankruptcy, residents are at the bottom
of the claimants’ hierarchy, while the executives – who with the
board exercise the ownership prerogatives of a nonprofit – and
the debt holders have top claim on the bankrupt estate.

Although there
is some evidence that FASB, the primary promulgating authority
for GAAP, recognizes these defects and is moving slowly toward a
more principled accounting, that will take years and FASB has
shown reluctance to move too quickly for fear of disrupting
businesses that are the clients for CPAs.In the meantime, it is rare that today’s financial
statements for an entry fee CCRC reflect the underlying economic
realities of the enterprise.

The National
Continuing Care Residents Association (NaCCRA) has long
advocated for a rectification of these accounting anomalies.
We believe further
that serious consideration should be given to bringing entry fee CCRC accounting within
the statutory accounting framework of the National Association
of Insurance Commissioners, as it applies to insured immediate
life annuities, at least, until such time as private accounting standards
develop the needed integrity.